Shaw Communications has pulled the plug on plans to launch a wireless phone service, favouring instead a less risky venture into Wi-Fi services — a decision that one analyst deemed "fundamentally flawed."

After spending three years and millions of dollars towards a wireless network rollout, the Calgary-based telecommunications company said Thursday it has determined that the potential payoff doesn't justify risking the $1 billion investment required.

"The wireless business is challenging from a number of perspectives and it became clear from our review that the economics of a new entrant wireless provider are not compelling," CEO Brad Shaw said on a conference call with analysts.

That's because new entrants lack the economies of scale and scope to compete effectively against well-established players, the company said.

Toronto-based Rogers Communications Inc. (TSX:RCI.B) has Canada's largest base of wireless customers, followed by BCE Inc.'s Bell Canada (TSX:BCE) and Telus Corp. (TSX:T), Shaw's main rival in Western Canada.

There are smaller, newer wireless carriers that have sprung up since the federal government auctioned off additional spectrum and set aside a portion of it for newcomers.

Shaw said the company (TSX:SJR.B) reached its decision after reviewing its assets, including how wireless would fit within its existing service bundles that include Internet, cable television and satellite television.

Instead, the company will focus on building a Wi-Fi network that will let customers use Shaw services outside their home — at coffee shops, shopping malls, and other 'hotspots'— a trend it has pegged for growth as it sees a shift in Internet usage toward handheld devices.

But Dvai Ghose, Canaccord Genuity head of research, said he believes "a Wi-Fi only strategy seems fundamentally flawed."

Among other reasons, Ghose doesn't see how it can generate revenue as he has seen no evidence of a profitable Wi-Fi only model.

"If you charge zero and you've got the cost of backhaul, then by definition you lose money," he said.

Shaw has already poured about $180 million into the development of a wireless network, about $50 million of which it will be able to use in the transition to the less capital intensive Wi-Fi network in Western Canada. Analysts estimate the Wi-Fi build will cost the company about $400 million.

Shaw said it is in discussions with Cisco Systems Inc. to launch in key markets by spring of 2012.

The wireless industry has changed dramatically since Shaw bought wireless licences at an auction in 2008 that opened up Canada's wireless industry to a number of new entrants, most of which have already launched.

The market has become saturated with new entrants including Wind Mobile, Quebecor's Videotron (TSX:QBR.B), Mobilicity, and Public Mobile. EastLink Communications is also planning to launch its own wireless services in Halifax.

Telecom analyst Maher Yaghi believes Shaw's decision to shelve its ambitions for a wireless business will impact the company negatively partly because many had assumed it would announce a wireless-sharing agreement with Rogers in the west.

"Overall, this announcement is negative from an operational perspective, as Shaw will not be able to compete head-to-head as effectively against Telus."

The reversal in Shaw's plans leaves the market speculating on several potential outcomes including acquisition or sale opportunities, Yaghi said.

"By not building its own wireless network, Shaw is leaving the door open to be acquired by Rogers should the Shaw family be willing to sell down the road as the combination should satisfy the Competition Bureau," he said.

However, the company could also be waiting for one of the new wireless players to tank before making an offer for the company — giving Shaw an established wireless business for less than the cost of building a new network, he said.

Shares in Shaw fell three per cent or 70 cents to $21.70 in afternoon trading on the Toronto Stock Exchange.

Shaw's retreat leaves Western Canada the only part of Canada where the cable competitor is not in wireless.

But Shaw believes the addition of a Wi-Fi service will help it to retain existing cable and Internet customers by giving them a value-added service.

The company also plans to generate revenue from selling the service to carriers looking to offload the burden of heavy downloading and data traffic on their own 3G and 4G networks, which some users complain has been bogged down by devices like the iPhone which are notorious for using a lot of data.

Shaw said the decision falls in step with major U.S. cable carriers Cablevision and Cox Communications who have launched Wi-Fi networks.

There is no way wireless companies will be able to build enough towers or create enough capacity on their traditional networks to deal with the coming influx of wireless broadband demand, and wireless companies might look to Shaw for support, the company said.

But Ghose wondered why Shaw believes its competitors would pay it for a Wi-Fi service rather than build their own, especially because Shaw mentioned that if the Wi-Fi business is successful it could be a launching pad to re-enter the wireless realm.

After the announcement Thursday, reports surfaced that Wind Mobile owner Globalive was interested in acquiring the wireless spectrum Shaw purchased in 2008, but Shaw said on the call it will "sit"on the licence and let it appreciate in value.